Pretty Vacant

Wow.  It's getting ugly out there.  As I write, the Dow is down more than 200 points - about 3%.  Ominously, it's crossed the 7,000-point floor of resistance.  But bad as it may seem here in the US, dark clouds are gathering over the rest of the world.

European (dis)Union

Look out Klaus and Francios!  The Euro is in danger.  Not a severe plummet from its lofty heights.  Nope, far worse:  outright dissolution.

It seems those greedy Germans aren't terribly interested in sacrificing their hard-earned, well-deserved creditworthiness to prop up the starving PIGS (my favorite new acronym that I've been using everywhere - Portugal, Italy, Greece & Spain).

Warum soll ich?  Gute frage, Klaus.  Why indeed should you burn credibility -- and credit -- on profligate states that failed to deflate their ridiculously high local labor costs while simultaneously inflating public debt to infinity and beyond?  During economic good times, the PIGS went to the trough of easy money extravagantly (ex. Italy >110% debt-to-GDP).

If Germany fails to cover others' debt, it may as well retreat to the safety of the (still sovereign) D-Mark.  Conversely, the PIGS may well simply declare default and force the issue.  Both scenarios effectively pull the plug on the Euro.

Without German endorsement, the Euro has no currency.  Without Club Med's obligation to its debt, their inflation rates rocket and force withdrawal -- or expulsion -- from the common currency.  Either way, the Euro would be no more.

It should be remembered that European Monetary Union was not decided with the peoples' consent.  EMU was rammed through by unelected technocrats and rubber-stamped by coerced parliaments.

German citizens have always cast a suspicious (racist?) eye toward the debtor PIGS.  The rest of Europe has always harbored resentment toward Germany's perceived effort to finish Hitler's mission to "unify" the Continent.

While the economic coalition frays, there remains no political, legal, or societal convention to bind the individual nations together.  Most distressing is the glut of feckless self protection when bold, unifying leadership is so truly needed.  Then again, Hitler was pretty bold.

And unifying.

China's Paper Dragon

Built on mercantile exports, heavy (foreign) corporate investment and an acquiescent citizenry, China's economy grew exponentially during the fat years.  Cheap goods went abroad in droves -- to places like the US -- fueling employment and rising living standards for a populace historically conditioned to subsistence and occasional starvation.

Companies around the world flocked to the land of plenty for cheap production and an exploding middle class's disposable income.

Developers built offices in all the major cities.  Once in short supply, the easy credit and promise of ever-expanding demand provided unimaginable incentive to build.  Anyone.  Anywhere.  The construction crane became the national bird.

According to the LA Times, there is more new (less than 5 years old) office space in Beijing than in all of Manhattan.  It would take 14 years to fill all that space -- even at peak occupancy rates from the bubble years (2004 to 2006), while implausibly freezing new construction.  Most of this development was financed by Chinese banks, apparently intent on avoiding tough medicine:  The necessary loan write-downs that would resolve the glut but wreak havoc on their books and the overall economy.  Sound familiar at all?

Meanwhile, the industrial sector has lost the floor under its feet. Without the US to buy (on easy credit) its output, many factories are closing.  Most are operating well below capacity.

Millions of workers -- who have sacrificed much to move from farms & family to urban industrial hubs -- find themselves out of a job, without severance and absolutely no social safety net (unemployment pay, COBRA, food stamps, job retraining, etc).  With the help of China's eugenic one-child policy, most are under 30 -- and male.

Youth, anger, testosterone, and idle time are a dangerous combination.  Social order is bound to be tested.  And the Communist regime hasn't exactly distinguished its humanitarian credentials even when protests are peaceful.  Two words:  Tiananmen Square.  Many of today's Party chiefs earned their first big promotions by tidying up that little mess.

Recently publicized Chinese economic stimulus is illusory and does nothing to solve the long-term problem of Chinese over-supply and under-consumption.  The sober savers are in worse shape than the drunken borrowers.

Irony can be pretty ironic sometimes.

Regional Chaos

(Japan & Taiwan, Poland & Eastern Europe, Middle East, Russia, Mexico & South America)

Battered Port in Storm

For all its problems the US remains the safest of all harbors.  The dollar -- despite being fiat, meaning otherwise worthless -- is still reserve currency to the world.  All nations have a major incentive to support it.  Otherwise their massive dollar reserves -- collected via those massive US trade deficits -- become worthless.

Worries are starting to pop up in the media that the US will return to the protectionist Smoot Hawley policies that plunged the world into depression back in the 1930's.  Smoot-freaking-Hawley.  Really?

By all accounts, back in the 1930's the US was the world's largest exporter when it wrongly pursued protectionism by enacting heavy import tariffs (similar in net effect to Imperial Preference, the British Empire's self-sufficiency policy).  Today, the situation is completely reversed:  the US is the world's largest importer.

China is now in the US's analogous 1930's position.  If anyone is going to "go all Smoot-Hawley on the world," it is China.  But they ultimately won't.  China has far more to lose in a trade war than the US.  They need someone to buy all the cheap crap they make.  Above all, the treasure upon which they sit is denominated in dollars. Devaluation would be harsh for America, catastrophic for China.

The US can go it alone if necessary; not a pretty scenario for sure. Does any other nation possess adequate "strategic depth" to weather this storm solo?

So Philbony asks:  Does any politician have the "strategic depth" to explain this situation to the various parties?  Or do anything about it?